Brief of the case:
The Hon’ble Himachal Pradesh High Court in the case of CIT vs. Swastik Foods held that the rejection of basis by merely expressing a doubt about the correctness of profit declared taking inconsistent GP ratio as basis cannot be a said to be rejection of books for incompleteness or incorrectness. Therefore, such rejection is not in line with Sec 145(3) and thus, bad in law.
Facts of the case:
- The assessee firm engaged in the business of manufacture and sale of wheat products. For the A.Y. 2003-04, it filed a return showing income of Rs. 34,71,660/- and claimed the entire amount as deduction under Section 80IB and accordingly declared NIL income in the return.
- During the course of assessment proceedings , the AO send balance confirmation to various debtors and creditors , out of 238 confirmation request send by AO only 95 parties responded to the same and letters to 143 parties were returned unserved as the parties could not be found at he addresses given.AO also noted certain discrepancies in the accounts and supporting vouchers. Considering all the facts, a special audit under Section 142(2A) was ordered with the approval of the Commissioner.
- After a period of time report of special audit was received by AO pointing out several discrepancies in the books of accounts in depreciation claim, expense claim without supporting vouchers, non-recording of certain purchase transactions and incorrect stock valuation.
- Taking into consideration the findings of special audit , inconsistency of profit and expenses as compared to subsequent years and non-confirmation of balances by parties , AO rejected the books of accounts as unreliable.
- He also found that in the immediate succeeding assessment year 2004-05, where the assessee was eligible for deduction under Section 80IB at only 25% of profits, the G.P. rate had been disclosed at 6.32% as against about 8% declared in the current year.
- Applying the profit rate of 6.32% to the sales of Rs. 15.69 crores declared during the year, the A.O. completed the assessment under Section 143(3) by a taxing a sum of Rs. 26,39,958/-. as income from undisclosed sources.
- CIT(A) allowed the appeal of the assessee on the ground that no recorded concrete basis in his order rejecting books of accounts and, therefore, the profit declared by the assessee could not be disturbed.
- ITAT also decided the case in favour of assessee and held that the AO has not recorded any finding that how books of accounts are incorrect and/or incomplete but he has merely doubted the trading results declared by the assessee.
- Aggrieved by the order of AO, revenue filed an appeal before High Court.
Issue before High Court:
Whether Assessing Officer was justified to reject the books of accounts by invoking the provisions of Sec 145(3) of the I.T Act, 1961?
Contention of the Assessee:
The learned counsel for the respondent has supported the order passed by the ITAT as being strictly in conformity with law. No other fresh argument was raised before the High Court.
Contention of the Revenue:
- The learned counsel for the revenue strictly opposed the findings of ITAT that the rejection of books of accounts by AO was based on merely inconsistent GP ratio because in the assessee order AO specifically mentioned that a large numbers of accounts of debtors and creditors could not be confirmed either by the parties or by the assessee in spite of several opportunities
- It was further contended that in special audit the major discrepancy had been pointed out by the Special Auditor whereby he had recorded that raw material of 6300 quintals valued at Rs. 39.7 lacs had not been recorded in the closing stock.
- In the present case, the A.O. had brought out several discrepancies in the assessment order which showed that the accounts as filed by the assessee did not reflect the correct profit. Therefore., he was justified in rejecting the books of accounts.
Held by Hon’ble High Court:
- As per the provisions of Sec 145(3) , Assessing Officer can reject the books of accounts maintained by the assessee if he is not satisfied about their correctness or completeness. It means there should be proven irregularities and discrepancies in the accounts for invoking the provisions of Section 145.
- But in the present case AO has simply doubted about the trading results declared by the assessee. AO in its order mentioned that there was a variation in the G.P. rate and level of expenses in comparison to the subsequent year. Accordingly Assessing Officer picked up the inconsistent financial results to indicate incompleteness or/and incorrectness of books of accounts.
- The special auditor’s report was also received by the AO but in assessment order there were no discussion of any finding of special audit to prove the incompleteness or/and incorrectness of books of accounts.
- The entire action of the A.O. appears to be based more on suspicion than on ground reality.
- Therefore, the court has no reason to interfere with the findings of ITAT that the rejection of books was merely on the basis of doubts without any concrete findings.
- In result the appeal filed by the revenue was dismissed.